Rijksuniversiteit Groningen. Studies in Local Marketing

Transcription

1 Rijksuniversiteit Groningen Studies in Local Marketing

2 Publisher: Labyrint Publications Postbus AX Ridderkerk The Netherlands Tel: Printed by: Offsetdrukkerij Ridderprint B.V., Ridderkerk ISBN , A. van Dijk All rights reserved. No part of this publication may be reproduced, stored in a retrieval system of any nature, or transmitted in any form or by any means, electronic, mechanical, now known or hereafter invented, including photocopying or recording, without prior written permission of the publisher. H1+preface contents final.doc

3 Rijksuniversiteit Groningen Studies in Local Marketing Proefschrift ter verkrijging van het doctoraat in de Economische Wetenschappen aan de Rijksuniversiteit Groningen op gezag van de Rector Magnificus, dr. F. Zwarts, in het openbaar te verdedigen op donderdag 8 januari 2004 om uur door Albert van Dijk geboren 24 augustus 1974 te Meppel H1+preface contents final.doc

4 Promotores Prof. dr. P.S.H. Leeflang Prof. dr. D.R. Wittink Co-promotor Dr. H.J. van Heerde Beoordelingscommissie Prof. dr. B.J. Bronnenberg Prof. dr. J.C. Hoekstra Prof. dr. drs. A.G.M. Steerneman H1+preface contents final.doc

5 Voorwoord Al snel nadat ik in mei 1999 aan mijn promotieonderzoek begonnen was, ontdekte ik dat het schrijven van een proefschrift een evolutieproces is. Het AIO-voorstel, waarin het promotieproject omschreven is, dient als een wetenschappelijke oersoep waarin allerlei basale ideeën ontstaan. Alleen die ideeën die zich het best ontwikkelen bereiken het proefschrift. Dit proces voltrekt zich helaas niet vanzelf. Als promovendus had ik de taak om de oersoep in mijn hersenen op te nemen en daar het evolutieproces te doen plaatsvinden. Dit valt te zien als een soort geestelijk kookproces waarbij begrippen als overkoken, stoom afblazen en aanbranden een geheel eigen betekenis krijgen. Om dit proces beter te laten verlopen, heb ik van mijn promoteres (Peter Leeflang en Dick Wittink) les in wetenschappelijk koken gehad. In sommige gevallen betrof dit daadwerkelijk meekoken, in andere gevallen hadden ze een meer ondersteunende en sturende rol. Dit laatste betekende dat zij de zich uit de oersoep voortspruitende ideeën op hun wetenschappelijke overlevingskans toetsten. Daar waar mogelijk werden ideeën bijgestuurd, echter dinosauriërs en dodo s werden zonder pardon door al dan niet menselijk ingrijpen uitgeroeid. Ik realiseer me hun onmisbaarheid voor de afronding van mijn proefschrift en wil hen dan ook op deze plek als eerste bedanken. Als tweede wil ik ACNielsen bedanken voor de sponsoring van het project, in het bijzonder mijn directe contactpersonen: Toine Boonman, Gilian Halewijn, Stephen Langestraat, Johan van der Horn en Rutger Druijve. Gedurende het proces hebben zij verschillende ingrediënten geleverd die tot het eindproduct geleid hebben. Vooral de bewaking van de praktische insteek heb ik zeer op prijs gesteld. Ook wil ik de leden van de beoordelingscommissie bedanken: Bart Bronnenberg, Janny Hoekstra en Ton Steerneman. Alledrie hebben ze hun eigen betekenis gehad voor mijn proefschrift. Bart Bronnenberg als inspirator voor hoofstuk 5, Janny Hoekstra als steun op persoonlijk en wetenschappelijk gebied en Ton Steerneman als ondersteuner op statistisch gebied. Voor een aantal hoofdstukken heb ik het geluk gehad met anderen te mogen samenwerken. Viola Braaksma en Hanneke Schreuder ben ik veel dank verschuldigd voor hun werk aan het onderzoek naar local marketing onder fabrikanten (hoofdstuk 3). Met name hun fanatisme om de non-respons terug te dringen is bijzonder te noemen. Josefa Parreño Selva wil ik bedanken voor het v

6 Voorwoord samen bevechten van dagelijkse verkoopgegevens van één supermarkt (hoofdstuk 5). Harald van Heerde ben ik dankbaar voor zijn bijdrage als co-promotor, met name voor het denkwerk aan en het afbakenen van het onderzoek in hoofdstuk 6. Als laatste wil ik mijn ouders, familie, vrienden en nog niet genoemde collega s bedanken voor hun persoonlijke ondersteuning. In het bijzonder bedank ik Arjan Wesseling, Mark Gorter, Willem Koop, Csilla Horvath en Jeannette Wiersema voor de hulp indien de oersoep eens aanbrandde, stoom af moest blazen of overkookte. Groningen, november 2003 vi H1+preface contents final.doc

7 Contents Chapter 1 Introduction 1 Chapter 2 Definition and History of Local Marketing Introduction Local marketing, definition Retailing in a historical perspective Local marketing in a historical perspective Summary and conclusions 18 Chapter 3 Local Marketing in Practice Introduction Research design Variables used for differentiation How manufacturers apply local marketing Marketing instruments and local marketing Why is local marketing applied? Summary and conclusions 40 Chapter 4 Existing Models and Store Profile Data Introduction Models in practice Models in academics Data Store- and competitor characteristics Consumer characteristics Summary and conclusions 64 Chapter 5 Sales Decomposition Within and Across categories Using Daily Data for One Store Introduction Literature review Cross-category effects Modeling daily data Elasticity decompositions 70 vii

8 Contents Unit sales decomposition The decomposition model by Van Heerde et al (2003a) Modeling approach Modifying the model of Van Heerde et al. (2003a) Decompositions Data Results Correlated covariates Within-category decomposition Cross-category decomposition Comparison of the within- and cross-category decompositions Sensitivity for the p-value used to obtain reliable decomposition results Conclusions 102 Appendix 5A Price definition 104 Appendix 5B Coefficient transformation 108 Chapter 6 Similarity-Based Spatial Methods to Estimate Shelf Space Elasticities Introduction Endogeneity Shelf space elasticities Model development Data Model specifications Models based on cross-sectional observations only Models based on two periods of cross-sectional observations Defining the spatial weight matrix Testing the spatial structure Predictive validation Robustness Empirical analysis Weight matrices and spatial dependence Estimation- and validation results Robustness Conclusions 136 viii H1+preface contents final.doc

9 Contents Appendix 6A The likelihood 138 Chapter 7 Summary and Conclusions Introduction Summary Limitations and future research 146 References 149 Samenvatting 157 ix H1+preface contents final.doc

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11 Chapter 1 Introduction In 1835 the Beagle arrived in the Galapagos archipelago. One of its crew members, Charles Darwin, discovered that different species of finches lived on the different islands. These finches had different types of beaks customized to the diet on each island (seeds, insects). Nature had formed these species by selecting those finches that were better able to survive (natural selection). This discovery led to Darwin s theory of evolution. When we travel around the country we discover that there are many differences between stores belonging to the same chain, situated in different neighborhoods. If we take a closer look we see that some of these stores customize their marketing mix to the specific needs and wants of a neighborhood. For example, stores in a neighborhood with many babies may (i) allocate more shelf space to products such as diapers and baby food, (ii) select products based on the consumer profile, and (iii) adapt the promotional program to the local competition. This strategy is used to perform better (survive) and is called local marketing the subject of this thesis. However, local marketing is not the only possible strategy to compete. Treacy and Wiersma (1993) state that the key issue for most firms is how to deliver superior customer value. This can be done by choosing one of the following value disciplines or strategies: customer intimacy (tailoring products to the individual customer), operational excellence (excelling in operational aspects) or product leadership (offering continuously improved products and/or services). Local marketing fits a customer intimacy discipline best (see also Chapter 2). In this thesis we study local marketing. Local marketing has recently received increased attention from both practice and marketing science. This study aims to enhance the knowledge about local marketing. Specifically, the objectives of this thesis are to study (i) the definition of local marketing and its origin, (ii) the implementation of local marketing in Dutch practice, (iii) existing models for local marketing, their shortcomings and the available data, and (iv) models that overcome selected shortcomings. 1

12 Chapter 1 In Chapter 2 we focus on the first objective: the definition and history of local marketing. We make the implicit definition used in this introduction more specific (local marketing as the customization of a store to the neighborhood). We compare alternative terms and definitions. The second part of Chapter 2 considers the origin of local marketing. We describe relevant developments in marketing and discuss their implications. This chapter also explains why local marketing is relevant nowadays. In Chapter 3 we consider local marketing in Dutch practice (second objective). We address the following questions: (i) why is local marketing applied, (ii) how is local marketing applied, and (iii) how much does local marketing depend on the marketing instruments. We study these questions in both a qualitative (in-depth interviews) and a quantitative way (written survey). In Chapter 4 we study existing models, their shortcomings and store profile data (third objective). First, we illustrate what is done in practice by describing the products offered by ACNielsen. Second, we discuss the models developed in the marketing science literature that relate store profile variables to marketing mix effects. The last part of this chapter considers the data on store profiles available in the Netherlands. We focus on data on consumer characteristics. In Chapter 5 we consider the problem that there is often insufficient data to estimate marketing instrument effects for a single store based on weekly data. There are usually too few weeks to estimate complex models for a single store. We calibrate a model on daily data which results in six times as many observations (the store is usually closed on Sundays) which enables us to estimate more complex models. We develop a model to decompose price effects in terms of sales within and across categories. We extend recently developed sales decomposition models. By modeling a single store we accommodate store heterogeneity by estimating store-specific effects. In Chapter 6 we consider the problems associated with the use of crosssectional data (across stores). Current models for local marketing use these data to estimate sales potential and instrument effects. In general, if instruments do not vary over time it is tempting to use cross sectional data to determine their effects. The problem with data across stores is that unobserved retailer behavior affects the use of the marketing instruments. That is, unobserved factors influence the levels of the instruments. This implies that the relation between sales and an instrument is only partially due to the effect of the instrument on sales, and that 2 H1+preface contents final.doc

13 Introduction OLS estimates are biased as a result. Specifically, the assumption in OLS of no correlation between the error term and the predictor variables is violated. We use similarity-based spatial methods to estimate shelf-space elasticity. Shelf-space allocation is an instrument that shows little or no variation over time. We develop a model that accommodates unobserved retailer behavior through a spatial structure based on store profiles. This spatial structure defines which stores are neighbors in a store profile space. The model relates the error term for a store to its contiguous neighbors. This method builds on the work of Bronnenberg and Mahajan (2001) who use geographical coordinates. We argue that in our application it is more appropriate to use store profiles instead. In Chapter 7, we provide a summary of the results of this thesis. We discuss the most important findings and give recommendations for future research. 3 H1+preface contents final.doc

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15 Chapter 2 Definition and History of Local Marketing 2.1 Introduction We study the definition and history of local marketing in this chapter. First we study how to define local marketing in Section 2.2. In the next two sections we consider local marketing in a historical perspective. Section 2.3 describes the relevant changes in marketing in the past century. We relate these changes to developments in local marketing in Section 2.4. Local marketing can be studied from both the retailer and manufacturer perspective. For the retailer, local marketing implies the optimization of the store s marketing mix. For the manufacturer, local marketing implies optimizing the product s marketing mix at the store level. We focus on the interaction between manufacturers and retailers, that is, how manufacturers and retailers optimize the marketing mix for a product (category) at the store level. 2.2 Local marketing, definition In this section we discuss (i) the different definitions of local marketing used and (ii) how to derive the most appropriate definition. Kotler et al. (2002) position local marketing on a scale ranging from mass marketing to individual marketing. Mass marketing implies the same marketing mix for all consumers. Individual marketing entails the products and marketing programs being tailored to the needs and preferences of individual customers. Local marketing lies between these two extremes and implies segmentation on a local level: Local marketing involves tailoring brands and promotions to the needs and wants of local customer groups - cities, neighbourhoods and even specific stores. (Kotler et al p. 318) Kotler et al. (2002, p. 318) consider local marketing and individual marketing as parts of micromarketing: 5

16 Chapter 2 Micromarketing is the practice of tailoring products and marketing programmes to suit the taste of specific individuals and locations. Micromarketing includes local marketing and individual marketing. Pearce (1997) uses this definition implicitly when he discusses micromarketing in a retailing context. Others define micromarketing in a different way. For example, Hoch et al. (1995) describe micromarketing as follows: Micromarketing seeks to customize retailing policies to exploit differences across stores in consumer characteristics and the competitive environment. Montgomery (1997) gives a similar but less explicit definition: Micromarketing refers to the customization of marketing mix variables to the storelevel. The definition Kotler et al. (2002 p. 318) use for local marketing is what Hoch et al. (1995) define as micromarketing. However, it should be noted that Hoch et al. (1995) focus their definition at the store level. The local marketing definition of Kotler et al. (2002 p.318) is broader and it includes strategies for clusters of nearby stores. Marketing practitioners use the expression local marketing to refer to storespecific use of the marketing mix. ACNielsen (Netherlands), for example offers a product called local marketing for this purpose (see and Chapter 4). We asked some practitioners to indicate what they consider local marketing to be 1,2 : Local marketing is adapting the merchandise offered in an individual store, based on local factors. Local marketing is born from the desire of the storekeeper: the storekeeper wants to distinguish himself from colleagues, he wants a local market. He wants specific customized actions. Local marketing is the translation of marketing from the national level to local consumer needs. Local marketing is the use of tactical instruments like assortment, logistics and promotion, at the store level. 1 These answers have been chosen from the responses to a survey of Dutch supermarket practices. See also Chapter 3. 2 We translated the answers from Dutch 6 h2_finaal.doc

17 Definition and history of local marketing Hence, marketing practitioners and Kotler et al. (2002 p.318) use the expression local marketing where Hoch et al. (1995) and Montgomery (1997) use micromarketing. We prefer the term local marketing because (i) it indicates that we are dealing with a geographic location, and (ii) it is more generally accepted. Although the expression micromarketing indeed indicates that it involves marketing at a disaggregate level, it is less explicit because it lacks a geographical connotation. It appears that most of the practitioners definitions are related to customization at the store level. This is in line with Hoch et al. (1995) and Montgomery (1997), but discordant with Kotler et al. (2002, p.318). We prefer a definition that makes the level of customization explicit. Furthermore, the definitions differ in how they specify the customization basis. Hoch et al. (1995), for example, mention consumer characteristics and competitive environment, while Kotler et al. (2002, p. 318) mention local needs and wants. Reinartz and Kumar (1999) show that store, market (competitor), and consumer variables determine the store s performance. We therefore include these variables in our definition. Hence, we define local marketing as follows: Local marketing is the customization of marketing mix variables to the store level based on consumer, competitor, and store characteristics. 2.3 Retailing in a historical perspective The retailing landscape changed dramatically during the last century. In around 1900, retailing was characterized by a great number of often privately owned small stores (Messinger and Narasimhan, 1995). Storekeepers, owners of one or two small stores, had to deal with powerful manufacturers. Management focused mainly on products and production. Nowadays, a few retail organizations dominate the market in which the consumer takes a central place. In this section we describe the developments in retailing and marketing relevant for local marketing. We focus on the following topics: (i) increase in concentration, (ii) power, (iii) sales and customer information, and (iv) marketing and management. We provide data on developments in Europe and in the U.S. 7 h2_finaal.doc

18 Chapter 2 Concentration Retail chains driven by economies of scale started to grow in the 1920s (Ghosh, 1994). In the beginning, chains were not more than groups of independently operating grocery stores. Major changes in retailing started with the introduction of self service in the 1940s in the U.S. and in the 1950s in Europe. This introduction marks the start of the emergence of supermarkets, characterized by a dramatic increase over the years in size, turnover, and merchandise sold. Figure 2.1 illustrates the development in store size for the last 20 years in Europe. Between 1980 and 1999, the percentage of stores with more than 1000m 2 selling area increased from about 25 percent to 53 percent. We can observe a similar increase in size for the US; the average chain store size increased by 38 percent over the period between 1983 and 1993 (Messinger and Narasimhan, 1995). Together with the increase in size, we see a dramatic reduction in the number of stores. Table 2.1 shows the development in number of stores per inhabitant for several countries over the last decade. Although the trend in all countries is a decrease in number of stores per inhabitant, there are large differences between countries. The number of stores per inhabitant tends to be low in Northern Europe and higher in Southern Europe. Parallel to the increase in size, we can observe an increased concentration in retail organizations. An ongoing process of national and international mergers and takeovers has resulted in a market that is dominated by a few firms. Table 2.2 shows the change in market shares for the top-3 supermarket organizations per country in the period The market share increased in all countries. The largest changes occurred in countries where the market share was relatively low in For the U.S. (not shown in the table) the concentration takes places in metropolitan areas. We find that the average market share per metropolitan area for the top-4 increased from 49 percent to 58 percent in the period , while at the national level the market share of the top 4 decreased from 22 percent to 16 percent (Messinger and Narasimhan, 1995). 8 h2_finaal.doc

19 Definition and history of local marketing Figure 2.1 Developments in store size in Europe, percentage of stores with more than 1000m 2 sales area (source: ACNielsen). 60% 50% 40% 30% 20% 10% 0% Table 2.1 Developments in number of stores per inhabitant (source: ACNielsen) Country Number of stores per 1000 inhabitants Belgium Germany France United Kingdom Sweden Finland Austria Italy Portugal Norway Spain The Netherlands United States 0.67 a 0.48 a Estimate for 1990, source Messinger and Narasimhan (1995) 9 h2_finaal.doc

20 Chapter 2 Table 2.2 Developments in the market share of the top-3 retail organizations (source: ACNielsen, FoodTrends) Country Market share top-3 retail organizations Belgium 55% 62% Germany 29% 53% France 37% 66% United Kingdom 31% 52% Sweden 81% 86% Finland 79% 80% Austria 42% 66% Italy 13% 32% Portugal 37% 57% Norway 55% 86% Spain 35% n.a. The Netherlands 45% 78% Sales- and customer information The introduction of scanning in the 1970s marks a fundamental change in available sales- and customer information. Before scanning, data collection focused on reporting the current state (what is the market share, relative price etc.). Data were typically collected on a bi-monthly basis (ACNielsen s bimonthly store audits). This changed after the introduction of scanning, which allowed for a more accurate and detailed data collection. Importantly, it is now possible to explain or predict market share or sales and use this information to develop better decision support systems (Leeflang and Wittink, 2000). On the other hand, firms have to find ways to analyze the dramatic increase in the quantity of available information, the so called data explosion. McCann and Callagher (1990) illustrate that for a typical category the transition from bimonthly store audit data to weekly store level scanner data has led to a 10,000 times increase in database size and a 9 times increase in the frequency. The development of customer information systems in the 1980s and 1990s provides even more insight. Supermarkets introduced customer cards (or loyalty cards) that link customers to sales (who buys what). In addition, we can see that list brokers started to collect detailed customer information on a large scale. Household level information is now available on supermarket choice, product preferences, and a variety of background characteristics. 10 h2_finaal.doc

21 Definition and history of local marketing Power In retailing, the power shift from manufacturer to retailers is often taken for granted. The possible causes include (i) concentration among retailers, (ii) consolidation into fewer and bigger stores, (iii) improved information systems, (iv) the fragmentation of consumer markets, (v) improved quality of retail management personnel, and (vi) a decline in manufacturers advertising (e.g. Wahl, 1992). On the other hand there are both practitioners and scientists who question this supposed shift. Table 2.3 shows the results of two different surveys about power among practitioners in Europe and the U.S. Although the questions in these surveys are different, they provide useful insight into about the power perceptions in Europe and the U.S. The first two columns of the table show European retailers expectations (in 1994) about the future purchasing power of European retailers. We observe that 74 percent of the respondents expect a shift in power toward the retailers and hence, that 26 percent does not. The last three columns in Table 2.3 refer to the U.S. They show chains, retailer and wholesaler answers to the question whether there has been a power shift and the direction of this shift. We see that the majority of the respondents agrees that a power shift toward the has occurred. In academic studies the power shift is addressed by several authors. The definition of power is important in this discussion. Many studies follow Stern and El-Ansari (1992), who define power as the ability of one channel member to control the decision variables in the marketing strategy of another member in a given channel at a different level of distribution. The key aspect of this definition is that power refers to influencing the other s conduct. Ailawadi et al. (1995) and Messenger and Narasimhan (1995) use a narrower power definition. They define power as the influencer s ability to affect the other s actions to improve his own position (profits). This means that one only has power if it results in a performance improvement. Studies that use a performance based power definition show that there is little evidence of a power shift. Messinger and Narasimhan (1995) conclude that neither accounting nor stock market data clearly indicate a shift in power from manufacturers to retailers. Ailawadi et al. (1995) report that a shift in market power can only be found in a few categories. 11 h2_finaal.doc

22 Chapter 2 Table 2.3 Purchasing power in Europe and the U.S. (source: Europe: ACnielsen, 1994, U.S: Progressive Grocer, 1992) Europe U.S. Expectations about future retailer purchasing power Respondent Has there been a power shift? Is it toward the retailer? Strong increase Increase Constant 18% 66% 14% Chains Wholesalers Manufacturers 61% 74% 85% 65% 55% 87% Decrease Strong decrease 1% 1% Studies that use a conduct based power definition find evidence for a power shift in different areas. Retailers, for example, have more pricing power (Kadiyali, Chintagunta, and Vilcassim, 2000) and can enforce guaranteed profit margins (Krishnan and Soni, 1997). Likewise, we see that retailers are able to demand a monetary contribution (slotting fee) for the inclusion of a new product in the assortment (see e.g. Bloom and Gundlach, 2000). Furthermore, retailers use increased store loyalty to introduce private labels. Table 2.4 shows private label shares for several European countries for 1986, 1992, and We see that, although the private label share differs dramatically between countries, the private label share grows in all countries except the Netherlands. In the Netherlands the share of private labels fluctuates at around 20 percent in the last 20 years. Based on separate data, we know that in the U.S. the private label share increased from 14 percent in 1958 to 19 percent in Table 2.4 Private label share (source: ACNielsen, FoodTrends) Country Belgium 15% 20% 26% Germany n/a 7% 23% France 14% 16% 19% United Kingdom 21% 37% 46% Italy 5% 7% 8% Spain 5% 8% 17% The Netherlands 19% 16% 20% 12 h2_finaal.doc

23 Definition and history of local marketing Thus, although changes in retailing have led to a situation where retailers exert more control at the instrument level (e.g. pricing power, slotting fees), this has not been translated into an increase in retailer performance (no support for a performance-based power shift). This phenomenon can be explained by the fact that manufacturers took actions to defend their position. The possible actions a manufacturer may take include: reducing the competition reinforcing the position toward the consumer cooperating with the retailer circumventing the retailer. Manufacturers may reduce horizontal competition and in this way limit retailer possibilities. Consequently, retailers become more dependent and manufacturers more powerful. Manufacturers can reduce horizontal competition through (i) cooperation with other manufacturers or (ii) mergers with and takeovers of other manufacturers. Critical for the success of this approach is concentration at the retailer side. Manufacturers are more likely to stay in power if they are more concentrated than the retailers. Table 2.5 shows the top-5 largest manufacturers and retailers worldwide. We observe that although the top-5 manufacturers are large in size they are much smaller than the top-5 retailers. The total turnover of the top-5 manufacturers is about half the turnover of the top-5 retailers. If we include the buying alliances between retailers the balance would shift even further (for example, Carrefour has a buying alliance with Metro, and Ahold with Safeway and Casino). Table 2.5 Worldwide turnover top-5 manufacturers and retailers (source: Fortune 500, 2002) Manufacturers a Turnover in billion $ Retailers b Turnover in billion $ Altria (Philip 73 Wal-Mart 220 Morris, Kraft) Nestlé 50 Carrefour 62 Unilever 46 Ahold 60 Procter&Gamble 39 Kroger 50 ConAgra 27 Metro 44 Total 236 Total 436 a Based on the following branches: Beverages, Tobacco, Consumer Food, Household and Personal products. b Based on the following branches: Food&Drug stores, general Merchandisers. 13 h2_finaal.doc

24 Chapter 2 Another strategy is to reinforce the position toward the consumer. It is more difficult for retailers to circumvent the manufacturer when consumers have stronger preferences for specific manufacturer brands. A stronger position toward the consumer implies that the brand is so important that it may determine the store choice. Absence of the brand may lead to store switching (Lal and Narasimhan, 1996). Krishnan and Soni (1997) state that the power issue between retailers and manufacturers is secondary to the question of who has the power over the consumer. They indicate that manufacturers may reinforce their position by being innovative and by striving for sustainable differentiation for their brands. Additionally, manufacturers may stimulate demand through increased advertising and consumer promotion (pull strategy). Third, manufacturers may choose to cooperate with the retailer. Cooperation serves to maintain the channel relationships and is often initiated by the dependent channel member (Rosenberg and Stern 1970, Schemerhorn, 1975, Frazier et al., 1989, and Skinner et al., 1992). Cooperation in general will result when the goals of channel members are compatible (e.g. Mohr and Nevin, 1990). One way to promote cooperation is through account management. The task of the account manager is to operate as an intermediary between manufacturer and retailer. Chu and Desai (1995) consider two tools to enhance retailer cooperation: 1. Customer satisfaction assistance; an investment by a manufacturer to reduce the retailer cost of improving customer satisfaction (e.g. training the retailer s employees, free consultancy services etc.). 2. Customer satisfaction index bonus; a lump sum monetary reward to the retailer based on some measure of customer satisfaction. They show that if retailers have a long-term orientation, customer satisfaction assistance is more effective than a monetary reward. A fourth possibility for manufacturers to defend their position is to circumvent the retailer, thus approaching consumers directly (direct marketing), or setting up vertical-marketing systems. A vertical-marketing system is distribution structure in which all members act as a unified system. Examples outside the supermarket business include Levi s original stores and Vodafone stores. Few such initiatives are successful in the food business. Examples in the Netherlands include Unilever-owned stores and De Gruyter. 14 h2_finaal.doc

25 Definition and history of local marketing Management and marketing 3 Markets became more saturated in the 1930s. Managers shifted their focus from production and the product to the selling of products and adopted the selling concept. The selling concept centralizes methods and techniques for selling products and services. At that time, marketing viewed the customer as a party to whom something is to be sold. This concept dominated until the early 1950s. With the occurrence of higher degrees of market saturation, the marketing concept was introduced. This concept is based on the idea that, at least within established product categories, manufacturers benefit from understanding customer preferences and needs. Thus, if manufacturers first evaluate the market, identify heterogeneity in consumer preferences, and use this knowledge to produce goods or services, the position toward the consumer will be improved. Under the marketing concept market segmentation is a key activity. The customer is viewed as a party for whom products and services are developed. A more recent development in marketing is the adoption of the customer concept. The customer concept is a management orientation that implies that firms initiate relationships with selected individual customers with whom superior customer values are designed, offered, redefined and realized in close cooperation with other partners in the marketing system in order to realize long-term profits through customer, partner, and employee satisfaction (Hoekstra et al., 1999). A consequence of the increased customer orientation is that stores and manufacturers pay more attention to positioning. In this way they aim to deliver more customer value. The store s positioning is defined by the merchandise offered, the quality of the service, the pricing strategy, the store format and related aspects that influence perception and buying behavior (Mulhern, 1997). The increased focus on positioning raises the question of how customer value should be delivered. In the past, customers judged the value of a product or service on the basis of a combination of quality and price. Today s customers, on the other hand, consider aspects such as convenience of purchase, after-sales service, dependability, etc. (Treacy and Wiersema, 1993). However, companies can be successful without meeting all customer expectations. Successful firms should focus on delivering superior customer value in line with at least one of the three value disciplines introduced by Treacy and Wiersema (1993) (operational 3 This section is partially based on Hoekstra et al. (1999). 15 h2_finaal.doc

26 Chapter 2 excellence, product leadership, and customer intimacy), while meeting industry standards in the others. Firms that strive for operational excellence want to be leaders in price and convenience. They do not cease to look for ways to reduce process costs, eliminate intermediate production and transaction steps and increase the efficiency of business processes. In general, the search for costs reductions leaves few opportunities for realizing individual customer values. Examples of such firms in retailing include Lidl, Aldi, Wal-Mart, and Ikea. Firms that choose product leadership focus on the production of a continuous stream of state-of-the-art products and services. R&D is very important for this discipline, which may make it difficult to develop innovations that can be commercialized quickly i.e., before competitors. Marketing in these firms serves to promote the acceptance of innovations. Nike is an example of a firm that excels in product leadership in the sport-shoe category. Firms that adopt a customer intimacy strategy to deliver superior customer value tend to customize products and services to the needs of individual customers. The customer lifetime value to the company is used for profit considerations as the costs per customer are high. In food retailing, we observe customer intimacy in manufacturer-retailer relationships. Examples of manufacturers that develop supermarket specific marketing programs include Kraft USA, and Nutricia (Numico). Both Kraft and Nutricia use information on stores sales, consumer demographics and buying behavior, and geo-demographic data to aid their sales force to customize marketing programs to individual stores. Home Depot is an example of a retailer that adopts a customer intimacy strategy. Home Depot clerks aim to decide together with the customer which product he or she needs. 2.4 Local marketing in a historical perspective About a century ago, storekeepers applied local marketing in a natural way. Storekeepers typically owned one or two independently operated stores. The storekeeper knew all customers and therefore could tailor his products and marketing programs to individual customer needs (individual marketing). Manufacturers then focused on products and production and had little reason to customize the marketing mix at the store level. Customization was not necessary as markets were unsaturated. That is, it was easier to find other growth opportunities. The manufacturer was more powerful than the retailer. 16 h2_finaal.doc

27 Definition and history of local marketing Manufacturers for example, imposed prices the storekeeper had to charge (manufacturer resale price maintenance) and could easily ignore retailer requests. This reduced possibilities for the storekeeper to apply local marketing. From the 1920s onward, we see that the pursuit of economies of scale led to a change from an individual- to a mass approach. Chains started to emerge and store size increased dramatically. Store managers of these larger stores no longer knew their customers personally and were no longer able to approach them individually. Furthermore, chains increased attention for positioning resulted in a focus on similarity between stores. The idea was that all stores should sell the same products and have the same prices and promotions (mass marketing). The chain s focus on a similar policy in all stores led to a centralization of the locus of control over marketing mix decisions. Store managers now had to operate within limits set by the chain, and this restricted the opportunities to apply local marketing. In a similar way, communication shifted from the local- to the national level. The consequence was that store managers were forced to implement the advertisement s contents. For example, an advertised price discount of 10 cents off the regular price of 1.00 (both announced) would force the store manager to give the announced discount and set the regular price at Over time the adoption of the marketing concept induced managers to use a more differentiated approach. For example, retailers might be better off if they approached different consumer segments in different ways. A first form of differentiation is that chains are starting to differentiate between stores of different sizes. Albert Heijn (a format of Ahold in the Netherlands), for example has five size-dependent assortments. Another form of differentiation is induced by increased attention for positioning. Retail organizations use differently positioned store formats for different consumer segments. This differentiation allows them to make location specific format choices based on consumer- and competitor characteristics. On the manufacturer side we see an increased focus on retailer preferences and needs. This change has been induced by the adoption of the marketing concept and the need to meet increased retailer demands. As a consequence, manufacturers have introduced account management which allows them to treat each retailer individually. For example, manufacturers are designing retailerspecific promotions (tailored promotions). The introduction of scanning and customer information systems in the 1990s allowed retailers to map the types of customer a store attracts. Retailers now have 17 h2_finaal.doc

28 Chapter 2 detailed knowledge about what their consumers buy and how consumers react to the marketing instruments. This information is used to further adapt stores to customer needs. Some retailers do this for groups of stores and other retailers do this for individual stores. Thus, we see that some retailers have returned to the situation of 100 years ago when store keepers customized individual stores to customer needs. Another effect of the introduction of scanning and customer information systems is that manufacturers also may know the store s customers. This situation is entirely new and is an important difference with the situation 100 years ago. Manufacturers use this opportunity to give store level advice on the marketing instruments. Importantly, the shifted power balance requires manufacturers to focus on optimization at the category-level instead of optimization at the brand level (see also Stern and Weitz, 1997). The consequences of local marketing for the retailer and manufacturer marketing strategies are different. For the retailer local marketing fits within the marketing concept. That is, the retailer adapts his product to fulfill the needs of the store s customers. For the manufacturer, the application of local marketing implies a shift from the marketing concept to the customer concept. Under the marketing concept account management was used to tailor products and services to groups of stores (the chain). Adoption of the customer concept requires customization at the individual store level. 2.5 Summary and conclusions In this chapter we have studied several aspects of local marketing. We have defined local marketing as the customization of marketing mix variables to the store-level based on consumer-, competitor-, and store profiles. Local marketing is a strategy that customizes the marketing mix at the store level and is the opposite of an undifferentiated strategy. Differentiation between groups of stores is an intermediary strategy. About a century ago storekeepers often owned one single store and applied local marketing implicitly. Management orientation in this era focused on product and production. Local marketing disappeared as a consequence of increased retailer concentration and the focus on similarity between stores. The same marketing mix was used in all stores. From the 1970s onward we see a shift to a more market oriented approach. Stores paid increasingly attention to positioning and differentiation. Since the 1990s we see that retailers have been increasingly 18 h2_finaal.doc

29 Definition and history of local marketing taking advantage of the opportunities offered by improved customer information to customize the marketing mix at the store level. During the last century, manufacturers faced increasingly demanding retailers. Retailers forced manufacturers to guarantee profit margins, pay slotting fees, and produce private labels. Manufacturers reacted to these changes by approaching retailers more directly. They focused on cooperation in order to avoid conflicts. Local marketing initiated by the manufacturer can be seen as a further development of this strategy. 19 h2_finaal.doc

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31 Chapter 3 Local Marketing in Practice 3.1 Introduction In this chapter, we examine how local marketing is applied in Dutch supermarkets. We describe the research design in Section 3.1 and present the results in Sections Section 3.2 focuses on how manufacturers differentiate between stores. Section 3.3 describes how manufacturers apply local marketing. Section 3.4 shows for each marketing instrument the restrictions manufacturers face in implementing local marketing and to what extent manufacturers apply local marketing. In Section 3.5 we formulate and test hypotheses about arguments for manufacturers to apply local marketing. 3.2 Research design Although the term local marketing exists in the marketing literature (see Section 2.2) and the concept appears to be used in practice, there are, to the best of our knowledge, no published answers to the following questions: Why is local marketing applied? How is local marketing applied? What are the possible compositions of the marketing mix given a local marketing strategy? We study these questions in both a qualitative and a quantitative way, starting with exploratory in-depth interviews, and then collecting answers to survey questions. We use the in-depth interviews to structure the survey. In-depth interviews We select respondents with a range of backgrounds. We interview nine store managers from five chains, including the four largest chains, consisting of a mix of franchise- and chain-owned stores located in different areas. We visit three head offices of retail chains and interview eight manufacturers representing different product categories. The manufacturers interviewed include ones that do not apply local marketing. 21

32 Chapter 3 We summarize the results as follows: Manufacturers develop local marketing strategies at the category level if they use local marketing. All manufacturer brands within a category are used within the strategy. Manufacturers need a sales force to implement local marketing. Some manufacturers equip the sales force with a computerized support system for local marketing (local marketing tool). Possible reasons for a manufacturer to use local marketing include (i) store heterogeneity, (ii) the importance of the relationship with the store managers, (iii) category leadership, (iv) market saturation, and (v) the product s sensitivity for impulse purchases. There is a difference between local marketing directed to franchise and chain-owned stores. Franchise supermarkets are owned by the store manager who faces less restrictions to apply local marketing and who is more motivated to apply local marketing. Therefore we collect data on both types of stores. The extent of local marketing is measured in two ways: (i) the percentage of stores for which marketing instruments are customized, (ii) the degree to which local marketing is applied (on a scale ranging from no differentiation between stores to local marketing ). On this scale, differentiation between regions is an intermediate form of local marketing. Practitioners expect this scale to be more informative than the percentage measure. For this reason we add a survey question about the variables managers use to differentiate between stores. Quantitative research The quantitative part consists of a survey among manufacturers of national brands sold in supermarkets to which we add market data from ACNielsen. The survey only covers manufacturers use of local marketing. It does not cover retailer behavior. The reasons for the exclusive focus on manufacturers are the following: Surveying manufacturers has the advantages that (i) each respondent is asked about one category (in some cases more), (ii) respondents provide information across stores, for example the percentage of stores where local marketing is applied. 22 h3_finaal.doc

33 Local marketing in practice Data collection at store level would be difficult. For each store, data on multiple product categories would be needed, and store managers (i) tend to be reluctant to answer lengthy questionnaires, (ii) are concerned about confidentiality, (iii) do not to know the details of all products given the high number of brands sold in a store. Questions We first ask which variables manufacturers use to differentiate the marketing mix between stores. The variables are differentiation between chains, regions, stores (size-based), franchise- versus chain-owned stores, individual franchise stores, individual chain-owned stores, and no differentiation. The questionnaire includes three questions to determine how manufacturers apply local marketing. These questions are (i) what is the size of the sales force in general (if any), (ii) does the manufacturer use a local marketing tool, and (iii) what are the inputs for this tool? We ask respondents to indicate the degree to which they apply local marketing per marketing instrument (identified in the in-depth interviews). The question is asked separately for for franchise- and chain-owned stores. First, we ask respondents about the percentage of stores for which they use an instrument for local marketing. This percentage indicates the absolute use of an instrument for local marketing. We calculate the relative use per instrument by comparing the absolute use with the total instrument use. Second, for each instrument we ask about the degree to which local marketing is used on a 7-point scale from no differentiation between stores to differentiation at the store level. We also ask respondents for an overall rating about the degree to which they apply local marketing on a scale from We call this score the (manufacturers ) overall self rating. We ask five questions on a five-point scale that may explain the degree to which local marketing is applied. These questions are to which extent i. household purchase behavior differs between stores ii. the relationship with store managers is important iii. manufacturers consider themselves category leader iv. the products are impulse products v. the market is saturated. 23 h3_finaal.doc

34 Chapter 3 Quantitative research, data collection We identify national brands sold in supermarkets from the membership database of the Stichting MerkArtikel (SMA). SMA is a Dutch association of Fast Moving Consumer Goods (FMCG) national brands, representing 135 manufacturers selling 1200 brands. Although this database facilitates the selection of national brands it has the disadvantage that it is based on self-selection by the manufacturers. This might result both in under-coverage (not all manufacturers are members) and over-coverage (some members might not meet the criteria for national brands). However, there are no obvious methods for identifying national brands. Importantly, the SMA list includes all major known national brands, which supports SMA s claim that most manufacturers of national brands are members. We use ACNielsen s category definitions to construct a sampling frame of manufacturer-category combinations 1. It is important to remember that that category definitions are ambiguous (Russell et al. 1999). We chose the categories defined by ACNielsen because they are based on the manufacturers perspectives. We contacted all manufacturers to identify who is in charge of local marketing. Potential respondents received the questionnaire by if possible, and otherwise by regular mail. Respondents were given the option to return their responses by , fax, or regular mail. We promised confidential treatment of the data and to send respondents a summary of the results. We sent a reminder (via ) after one week, and subsequently called all parties who had not yet responded. All returned questionnaires were checked for consistency and missing values. Respondents were contacted again for additional information, if required. The total response was 49 (35 percent). We compared respondents size (turnover) and categories to determine possible non response biases. Respondents are evenly spread across categories. The maximum number of respondents per category is three. A size (turnover) comparison shows that the number of small respondents is larger than the number of medium sized and large respondents. The distribution is comparable to the total population. However, we note that respondents may have more affinity with local marketing than non respondents. In this case respondents are likely to apply local marketing more than non-respondents. 1 In what follows we use the term manufacturer instead of manufacturer-category combination. 24 h3_finaal.doc